What is a corrective tax?
Understand the Problem
The question is asking for a definition and explanation of what a corrective tax is, which typically refers to a tax imposed on activities that generate negative externalities in order to correct market outcomes.
Answer
A tax imposed on activities generating negative externalities to reflect their social marginal cost.
A corrective tax is a tax levied on activities that generate negative externalities, with the aim of making the private cost of these activities reflect their social marginal cost. This encourages private decision-makers to take into account the social costs their activities impose on society.
Answer for screen readers
A corrective tax is a tax levied on activities that generate negative externalities, with the aim of making the private cost of these activities reflect their social marginal cost. This encourages private decision-makers to take into account the social costs their activities impose on society.
More Information
Corrective taxes are also known as Pigouvian taxes, named after the economist Arthur Pigou.
Sources
- Corrective Taxes - IFS - ifs.org.uk
- Corrective Tax Definition (& Examples) - dyingeconomy.com
- Corrective Taxes to Save Lives | Center For Global Development - cgdev.org
